The Company: EqualFooting.com
Founded June 1999
Location Dulles, Va.
Mission Building an online marketplace that puts small businesses and suppliers on a par with large ones for purchasing, financing and shipping Venture capital funds $70 million as of September
Angie Kim still has the white board in her basement.
EqualFooting.com was founded by Kim, who is president, Jim Fox, CEO, and Aaron Martin, chief of business development, in June 1999. The three worked for McKinsey & Co. performing e-commerce implementations (in fact, Fox was head of McKinsey’s e-commerce business implementation). After helping a large business put together its e-commerce division, the three decided to launch an Internet company.
But what kind of company? Consumer-oriented businesses were out of the question, Kim says; the founders could see that space was crowded. So business-to-business it was. “We looked around,” Kim says. “At the time, most companies going after B2B were aiming at big business—Commerce One, Ariba and the like. We said the natural next wave was small business.”
Given McKinsey’s data- and task-driven culture, it should be no surprise that the new partners decided to team up first and choose their field only after careful analysis of markets and opportunities. That’s where the white board came in. On it, the founders listed industries on one side (maintenance, repair and operating supplies [MRO]; office supplies; accounting and professional services were all in the running, Kim says) and criteria (such as market fragmentation, price-arbitrage opportunity, industry profitability and competitors) on the other. “We said, ’Let’s become a virtual purchasing agent for small companies,’” Fox says. Then they asked where those small companies needed the most help. Their answer was MRO—industrial gear ranging from front-end loaders to staple removers.
Moreover, the founders decided on an ambitious three-pronged strategy encompassing not only MRO but small-business loans and shipping. Kim says early investors urged the founders to tackle these markets one at a time, starting with MRO, to avoid market confusion.
Thus was born EqualFooting.com. Based in Dulles, Va., the business-to-business exchange cleverly targets two sectors that fly beneath the radar of many corporations: small business and MRO. In addition to selling MRO supplies, EqualFooting helps small businesses arrange loans and shipping for the goods they buy at the site. The proprietary decision-support tools that handle these chores may be a business opportunity themselves: EqualFooting is eager to use an application service provider (ASP) model to lease its finance software, for example, to other exchanges.
That hoped-for business would augment the company’s current revenue stream, which consists of a percentage of every deal transacted (5 percent for the “vast majority” of partners, says Fox of the performance-based commission structure) whether purchase or loan. Thus, EqualFooting, like many businesses seeking to leverage their technology investment, has a twin-pronged attack. And then some.
At a time when many startups, and even relatively mature Internet companies, are scrambling to secure financing, EqualFooting has had the opposite problem: People keep trying to shove money in the company’s face. It reportedly has spurned offers from some heavy investors, including Deutsche Banc Alex Brown. In an unusual arrangement, the lead investor in EqualFooting is not a venture capital company or investment banker, but Textron, a Providence, R.I.-based aircraft, automotive, finance and industrial company. With the deal, Fox says, EqualFooting “gets the [industrial] expertise of a traditional-economy company”—in addition to $25 million, which never hurts either. All told, the company has raised about $70 million. Fox believes the manufacturing knowledge his business gains from the Textron partnership can help it better serve customers.
EqualFooting’s enviable war chest may be traceable to the McKinsey-bred founders’ careful selections. On three counts—MRO, business-to-business exchange and small business—EqualFooting seems to be in the right place at the right time.
First, MRO appears ripe for e-commerce-style consolidation. The size of the U.S. MRO market is difficult to pin down, as it overlaps with the broader industrial supply category; estimates range from $187 billion to double that. The Goliath in this highly fragmented industry, Lake Forest, Ill.-based W.W. Grainger, had 1999 sales of $4.5 billion—and held less than a 2 percent market share, according to Grainger’s annual report. Most MRO companies are much, much smaller and have only a local or regional presence. In addition, they are often family-run businesses that have been reluctant (because of tradition) or unable (because of cost) to exploit the Internet.
MRO is a classic case of a market that was ready for a seismic shift, says Tim Minahan, an analyst at the Boston-based Aberdeen Group. The field’s size and variety have traditionally forced distributors to choose one of two strategies: They could be a mile wide and an inch deep, offering only the most popular lines—Minahan points to market leader Grainger as an example—or extremely deep in a very narrow range of products (fasteners, perhaps, or cleaning supplies). “The Net allows a new brand of superdistributor,” Minahan says. “It lets you [represent] all those specialized distributors.”
Exchanges are hot too. According to a report this year from Cambridge, Mass.-based Forrester Research, business-to-business exchanges (which Forrester calls e-marketplaces) are poised to take off. Today, the report says, 28 percent of buyers and 18 percent of sellers use such exchanges. In 2002, those numbers will grow to 69 percent and 71 percent, respectively. Forrester sees the business-to-business e-commerce market hitting $2.7 trillion in 2004—with exchanges accounting for 53 percent of that trade.
As for the decision to target small businesses, Fox says, “The underlying cost of sales to small business is double digits. That’s why a lot [of companies] don’t want to sell to that segment.” So EqualFooting detected a market that could benefit from Internet-borne efficiencies.
Virtual Agent Man
From the beginning, EqualFooting’s founders knew the company had to be more than a portal site for those seeking a good price on shop-vacs. The company’s homepage puts equal emphasis on inviting registered users (of which it claims 60,000), getting a loan and setting up shipping.
Not that those shop-vacs are unimportant; Fox says EqualFooting has partnered with 3,000 suppliers and boasts more than 300,000 items in its catalog. But Fox is the first to admit that while EqualFooting’s small-business focus is rare, the company fights for at least mind share with a host of competitors that includes Grainger and a stockroom of others (see “Plentiful Suppliers,” Page 204).
He is most enthusiastic when discussing the services he thinks differentiate EqualFooting. “We respect Grainger a ton,” Fox says. “They’re a real pioneer in B2B e-commerce…. But we’re more broad, we’re interested in being your purchasing agent for everything you buy.” Everything? “Hey, last week we sourced 20 Jacuzzis for a good customer.” Demonstrating appropriate startup chutzpah, Fox says, “Grainger would be an ideal supplier to EqualFooting.”
Fox sees EqualFooting’s linchpin application as a major differentiator and a business opportunity in its own right. CIO Mintu Bachann joined the company in December 1999; before that, he was director of Oracle Corp’s. architecture group. At EqualFooting, his first priority was to spearhead development of the decision-support system, which is built on extensible markup language, the specification that is succeeding HTML as the Esperanto of the Web. The application prefilters applicants’ basic requests and profiles, then uses that information to route applications to appropriate lenders (whose lending criteria vary greatly). It can also suggest that a business lease, rather than buy, expensive equipment.
Fox has grand plans to lease the application to other business-to-business e-commerce players. EqualFooting may “actually brand our financing platform as a separate brand,” he says. For instance, “You go to a chemical site—they sell some very expensive gear there—we want to give you a button that says, ’Get a lease for this.’”
To cap off its ambitious plans, EqualFooting aggressively pursues partnerships with both old-economy companies, such as Textron, and other Internet companies (“We’re an anchor tenant on Yahoo’s B2B site,” Fox says).
Asked if his company may have fingers in too many pies, Fox shrugs it off. “It’s still not the largest organization I ever managed,” he says of the company’s 200 employees. He also points to the McKinsey pedigree as an asset; EqualFooting is a “very execution-oriented environment, very fact-based…. There’s a bias on being buttoned up, having a plan of action and executing.”
The View from Kenosha
Dennis Northern has a globe in his office. When his Kenosha, Wis., electrical supply company ships an order to a new state or country, he marks the locale with a little flag.
The globe is starting to look like a pincushion. “We’ve shipped to 42 states plus Japan, Saipan, England, [U.S. territory] Guam, Japan, Germany and Switzerland,” Northern says. He won’t divulge revenue numbers—”Let’s just say we’re a small business”—but Northern’s company is getting bigger while the unblemished parts of his globe get smaller. Credit goes to both Northern Light & Electric Supply’s aggressive pursuit of Internet business through its own website (www.northernlighting.com) and its partnership with EqualFooting.
Northern was surfing the Web last November, he says, looking for new e-business opportunities, when he came across EqualFooting’s site, which was still a mere placeholder. “We signed up [as a partner] before they opened,” Northern says. He has no regrets. “It’s put my small business on an even keel with the big boys.” EqualFooting “goes out and gets a customer base and requests for quotes,” he says. “Then they come to guys like me.”
Like EqualFooting’s other partners, Northern Lights receives e-mail informing the company when new orders come in. Somebody at the electrical supply business then logs in at the EqualFooting site to learn the details of the order.
Northern sees the EqualFooting model as a “win-win-win. It’s a win for customers ’cause they’re not going to buy from me or anybody unless the price is right. It’s a win for EqualFooting.com because it picks up the five points. And it’s a win for us with new customers.” He says the company’s biggest weakness from his point of view is that its rapid growth makes it hard to contact. “They’re a little disorganized,” Northern says. “Their [telephone] extensions change all the time.”
This minor complaint isn’t enough to send Northern back to the Web seeking new partners. “I’ve been approached by three EqualFooting.com competitors,” he says. “One I looked at. But EqualFooting is user-friendly. It’s got great people. We’re loyal to them.” Besides, he adds, he’s too busy with new business to look around. In fact, he says, he needs to wrap up his telephone interview because he just checked the EqualFooting site and “I have 100 quotes I’ve got to get done.”
Rick Silber, owner and CEO of City Group, a Jessup, Md.-based distributor of cleaning supplies, has been ordering products—usually hard-to-find items it doesn’t stock—through EqualFooting for about a year. He says the company’s management and openness to new business opportunities sold him. “I’m impressed by all of its alliances with big hitters,” says Silber.
But Silber points out that one important promise of all Internet exchanges—rock-bottom price, regardless of where you find it—is not always an ally of small, regional businesses like City Group, which he says had revenues of about $4 million last year. “We sell quality products, and we support the heck out of ’em,” he says, conceding that competitors “10 times bigger than me” will always win on price. Thus Silber raises an interesting problem for small businesses: Exchanges like EqualFooting can grow your customer base, but what if the new customers care only about the bottom line?
Some experts question whether EqualFooting’s 5-percent-off-the-top revenue model can hold up. It seems inevitable that competitors will offer 4.5 percent, then 4 percent and so on all the way down to PC-manufacturer-level subatomic profits.
Fox responds on several fronts. First, he points out that high sales costs and low per-transaction figures dampen many organizations’ desire to target small business. EqualFooting’s 5 percent represents “a commission that’s a known cost,” he says; that predictability is important to small-business owners. Moreover, for partners like Northern Lights, that 5 percent tends to be a commission on sales it would not have realized without EqualFooting.
The company’s head start may also be a formidable advantage. After all, what good is a theoretical competitor’s one-point-lower commission if it can promise partners a sales volume only half of EqualFooting’s? “Someone can do it cheaper,” Fox says, “but what’s the base they’re selling to? There are not going to be 57 marketplaces like this. The ones that reach liquidity are going to dominate.” The Forrester report agrees: “The huge volume of business to business trade will give rise to a multitude of online marketplaces, but only a very few of these Internet newcomers will grow up to be commercial giants.”
Will EqualFooting.com be one of the very few?